The Consumer Financial Protection Bureau (CFPB) has once again been found to be unconstitutionally structured. The ruling is a win for CFPB critics and calls into question most actions taken by the agency.
A unanimous three-judge panel of the U.S. Court of Appeals for the Fifth Circuit held on Wednesday that the CFPB’s funding mechanism, funded by fees generated by Federal Reserve Board not through Congressional appropriations, is unconstitutional. According to the court, the CFPB’s funding is double insulated from Congress and, thus, is unaccountable to both Congress and the public. As such, the CFPB’s funding mechanism violates the Constitution’s separation of powers design and, specifically, the Appropriations Clause.
CFPB funding mechanism “cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers”
The panel’s ruling in Consumer Financial Services Association of America v. Consumer Financial Protection Bureau, No. 21-50826, results from a multi-year litigation challenging the CFPB’s Payday Lending Rule, finalized in 2017. The Consumer Financial Services Association of America (CFSA), an industry trade organization for small dollar lenders, challenged the rule and also challenged the CFPB’s constitutionality.
While CFSA presented several reasons why the CFPB is unconstitutional, the Fifth Circuit opinion relied on a challenge to how the CFPB is funded. The panel’s decision built heavily upon a concurring opinion from a previous Fifth Circuit case explaining that the funding mechanism was unconstitutional.
Under the Dodd-Frank Act, Congress established the CFPB as part of the Federal Reserve System, with its funding coming from the Federal Reserve directly. Furthermore, the CFPB may ask the Federal Reserve for as much funding as it needs so long as the amount requested does not exceed 12 percent of the Federal Reserve’s operating expenses. For example, this year, the CFPB could have requested up to $734 million from the Federal Reserve, and indeed, it requested $641.1 million. Once the CFPB has requested an amount from the Federal Reserve, the Federal Reserve “shall transfer to the Bureau” the amount requested. Neither the Federal Reserve nor Congress may review or revise that amount.
In its opinion, the Fifth Circuit stressed that while the Constitution’s Framers had intended that the power of the purse and the power of the sword be separate in our system of government, Congress had combined the two into the CFPB. According to the court, the Appropriations Clause was deliberately added to the Constitution so that Congress would have exclusive power over the federal purse.
The panel said, “The Appropriations Clause… does more than reinforce Congress’s power over fiscal matters; it affirmatively obligates Congress to use that authority ‘to maintain the boundaries between the branches and preserve individual liberty from the encroachments of executive power’.”
The CFPB countered that because Congress enacted the Bureau’s funding mechanism in the Dodd-Frank Act, that was enough to satisfy the Appropriations Clause. The CFPB also argued that since every other court to consider the funding mechanism found it to be constitutional, the court, here, should too. The court rejected both arguments.
First, it said that the Appropriation Clause does not just require Congress to pass a law to authorize funding, it must do so through an appropriation. Second, the panel disagreed with the other courts’ conclusion. While other courts did not find the CFPB’s funding mechanism combined with its broad authority over consumer financial services constitutionally objectionable (e.g., PHH Corp. v. CFPB), the court, here, did. Ultimately, the court determined that CFPB’s funding mechanism could not be reconciled with the Appropriations Clause and the constitutional principle of separation of powers and is, thus, unconstitutional.
CFPB Payday Lending Rule Fate
What does this mean for the Payday Lending Rule and other rules promulgated by the bureau? According to the court, while the CFPB did not have the lawful money necessary to promulgate the rule, it did have the authority to promulgate the rule. As a result, under current Supreme Court precedent, this means that rules promulgated by the CFPB are not automatically invalid due to the unconstitutional funding mechanism. Instead, litigants challenging a rule promulgated by the CFPB must show that the unconstitutional funding mechanism caused them harm for the rule to be invalidated.
For CFSA, this is straightforward. The court said, “Because the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency’s unconstitutional funding scheme, there is a linear nexus between the infirm provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule). . . . Plaintiffs were thus harmed by the Bureau’s improper use of unappropriated funds to engage in the rulemaking at issue.”
Broader Consequences for the CFPB
The Fifth Circuit’s reasoning would seem to apply to any rule promulgated by the bureau. Indeed, the ruling seems to have laid the groundwork for every rule promulgated by the bureau to be invalidated. The same would seem to apply to examination findings and enforcement actions taken by the CFPB.
Given the wide implications of this case, the CFPB will seek to overturn the panel’s decision. The CFPB could either appeal the decision to the whole Fifth Circuit (i.e., a review en banc) or seek a stay and ask the Supreme Court to review the decision. In the past, the CFPB opted first for an en banc review before making its way to the Supreme Court but given the conservative leanings of the Fifth Circuit the CFPB may skip that step. In the meantime, the panel’s decision is binding on federal district courts in Texas, Louisiana, and Mississippi, and the CFPB’s constitutionality is likely to now be challenged in other courts by plaintiffs facing down a CFPB enforcement action.
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